Stock Markets, Banks, and Economic Growth Ross Levine

Stock Markets, Banks, and Economic Growth Ross Levine; Sara Zervos The American Economic Review, Vol. 88, No. 3. (Jun., 1998), pp. 537-558. Stable URL: http://links.jstor.org/sici?sici=0002-8282%28199806%2988%3A3%3C537%3ASMBAEG%3E2.0.CO%3B2-9 The American Economic Review is currently published by American Economic Association. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/journals/aea.html.

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. The JSTOR Archive is a trusted digital repository providing for long-term preservation and access to leading academic journals and scholarly literature from around the world. The Archive is supported by libraries, scholarly societies, publishers, and foundations. It is an initiative of JSTOR, a not-for-profit organization with a mission to help the scholarly community take advantage of advances in technology. For more information regarding JSTOR, please contact support@jstor.org. http://www.jstor.org Tue Feb 19 03:43:10 2008 Stock Markets, Banks, and Economic Growth By Ross LEVINEAND SARAZERVOS* Do well-functioning stock markets and banks promote long-run economic growth? This paper shows that stock market liquidity and banking development both positively predict growth, capital accumulation, and productivity improve- ments when entered together in regressions, even after controlling for economic and political factors. The results are consistent with the views that Jinancial markets provide important services for growth, and that stock markets provide different services from banks. The paper also Jinds that stock market size, vola- tility, and international integration are not robustly linked with growth, and that none of the financial indicators is closely associated with private saving rates. (JEL GOO, 016, F36) Considerable debate exists on the relation- Besides the historical. focus on banking, ships between the financial system and eco- there is an expanding theoretical literature on nomic growth. Historically, economists have the links between stock markets and long-run focused on banks. Walter Bagehot (1873) and growth, but very little empirical evidence. Joseph A. Schumpeter (1912) emphasize the Levine (1991) and Valerie R. Bencivenga et critical importance of the banking system in al. ( 1995) derive models where more liquid economic growth and highlight circumstances stock markets-markets wliere it is less ex- when banks can actively spur innovation and pensive to trade equities-reduce the disin- future growth by identifying and funding pro- centives to investing in long-duration projects ductive investments. In contrast, Robert E. because investors can easily sell their stake in Lucas, Jr. ( 1988) states that economists the project if they need their savings before "badly over-stress" the role of the financial the project matures. Enhanced liquidity, there- system, and Joan Robinson (1952) argues that fore, facilitates investment in longer-run, banks respond passively to economic growth. higher-return projects that boost productivity Empirically, Robert G. King and...

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